In mergers and acquisitions, it is ideal that buyers, sellers, lawyers, and environmental consultants work together to craft the perfect deal that results in a win for all sides. However, the world is not perfect, and it’s highly likely the various stakeholders will not agree on everything. Environmental due diligence is a fundamental component of the mergers and acquisitions process. It should be completed carefully to identify, understand, and evaluate who retains or inherits current or past environmental liabilities. Who is responsible for what? Is the purchaser buying the company’s assets, or buying the tax structure, tax identification, and all items through a stock deal? Do long-term liabilities accompany the sale? If not, how are they insured or indemnified, and is the indemnification worth the paper on which it is written?
We are only beginning to scratch the surface of the complex questions that may arise when companies consider a merger or acquisition. Is it not true that any combination of two entities in essence is both a merger and an acquisition? Who is really in charge and what defines the relationship? If you say one entity was acquired, isn’t that still a merger of the companies into one, no matter who was acquired? This is fun, and you can infer how quickly this differing of opinions can spiral into an argument.
So, what’s the difference between a merger and an acquisition? And why do we care whether it is an asset or stock purchase agreement? What about the property associated with the transaction? Who deals with that and the potential liabilities? While environmental risks typically reside within the land, they are not always found there. If you consider environmental expenses and tax deductions, air permit issues, historical management of wastes, or compliance with municipal wastewater permits, concerns begin to stack up.
What does an asset purchase offer to the buyer?
In an asset purchase, the buyer purchases the “hard” assets of the firm – structures, yellow iron, trucks, contracts, employees, client lists, goodwill (relationships, knowledge) – but not the land, tax structure, tax ID, etc. This means the buyer can pick and choose which liabilities, if any, they are willing to assume. It seems like a no-brainer, right? Well, consider this – in an asset purchase, the buyer is usually unable to transfer any of the seller’s existing permits, licenses, or contracts because in this type of sale, the tax identification number and tax structure stay with the stock. Previous spills or releases, water rights, and mineral rights, for example, are not typically included. Attempts to limit the purchase to the assets only, with everything else leased, may fail. Additionally, as you continue to operate, the material threat of a release is still there. Although the purchase excluded responsibility for prior liabilities, your company could still cause or contribute after the fact, all without being the owner. By not purchasing the tax structure or ID, the current “stock” owner retains much of the long-term liability.
What about a stock purchase?
With a stock purchase, the buyer purchases a company’s stock in whole – the physical assets, contracts, payroll, tax structure, tax ID, and all the facility’s past sins not limited to long-term liabilities, spills, releases, non-compliance, etc. The buyer also becomes responsible for compliance with environmental permits and any contracts that exist with the old company’s customers; they’ve bought the whole entity. Now, have they? At the surface, it may seem that they have bought everything, but as with any deal, you can carve out whatever you wish in a contract (to an extent). A contract is only worth the enforceability it carries.
Indemnification for Environmental Risks
Let’s say that Company A is responsible for the waste pit buried out back, and this area is carved out of the stock deal. Company A is responsible for it; however, it turns out that liability to the environmental regulatory authorities runs with the title, the land, and the owner. So, while you have a contract that says Company A is responsible, they are only responsible to the extent that they are solvent. How do we deal with this? You should weigh accepting an indemnity from companies that have resources to back it up versus companies that do not. If you bought a company’s total resources, there may not be any resources for them to indemnify your new company. You have all their resources! You may have an indemnification against them stating they are responsible for cleanup, but what if they bankrupt the company responsible for the indemnification? In that case, the responsibility reverts to the titled of the land, owner, or operator.
To further illustrate, the company We Take Your Sludge has one location with multiple customers. All their assets and stock are in this one location and their customers bring their material to that single location. They would like to sell to their competitor, We Want To Take Your Sludge. As negotiations begin, We Take Your Sludge proposes a stock deal so that their owners are responsible for as little as possible going forward. Meanwhile, We Want To Take Your Sludge prefers an asset deal that would limit their liability for the past transgressions tied to the We Take Your Sludge owners. We Take Your Sludge proposes to indemnify We Want To Take Your Sludge and commence a stock sale. The problem here is We Take Your Sludge is potentially not worth that amount of money after this transaction (considering their taxing structure, money movements, etc.); they are selling their source of income generation. So how valuable is an indemnification from We Take Your Sludge (how much does paper cost)? Vice Versa, when Exxon Mobil indemnifies We Want To Take Your Sludge, there is a pretty good bet they will be solvent for a long time.
Why does any of this matter? It’s not enough for you to be well informed. You must also have sound legal counsel and a knowledgeable, experienced consultant who understands what you want to accomplish with your merger or acquisition. Some owners do not disclose enough information with their consultants to allow them to best assist them with their mergers and acquisitions. Likewise, many consultants do not fully understand the legal ramifications or desired structure of the venture.
At Braun Intertec we have assisted clients in the environmental negotiation of mergers and acquisitions through the years for both asset and stock sales. As your Consultant of Choice, we provide creative consulting solutions tailored to the needs and desires of your specific project. This approach allows our clients to make informed investment decisions while providing the tools and resources necessary to negotiate more favorable terms and close that “perfect” deal.
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